Philip Hammond promised on Thursday to fight the City of London’s corner in Brussels, saying the EU had made no credible proposals for post-Brexit regulation of financial services, and doubling down on the UK’s demand for a deal that would allow for divergence of rules while maintaining market access.
There have been no formal negotiations yet on the future of financial regulation after Brexit. Michel Barnier, the EU’s chief negotiator, has dismissed out of hand the UK’s suggestion that the City’s access to EU markets should be governed after Brexit by a system of “mutual recognition”, under which each side would set its own rules and agree to recognise the other’s.
Mr Hammond, making his annual address at Mansion House in the City of London, said he had so far seen no credible alternative to the model he had set out. Existing “ equivalence” arrangements — offering access to EU financial markets only on terms dictated by the EU — were “piecemeal, unilateral and unpredictable”, he said.
Moreover, proposals to build on the existing system — so-called enhanced equivalence — had “nothing to do with equivalence . . . and everything to do with an ambition to force the location of business into the EU”, he said.
The chancellor’s comments suggest the Treasury is now closing ranks with the Bank of England in arguing for mutual recognition, despite earlier indications that the chancellor might be willing to cede some regulatory autonomy in order to win better market access.
Mark Carney, the Bank governor, told the Mansion House audience that the central bank still believed it was both feasible and desirable to base the future financial services relationship with the EU on “commitments to achieving equivalent outcomes” — a shorthand for mutual recognition.
In a subtle dig at European policymakers, Mr Carney said global co-operation in regulation was essential. The UK liaised with foreign peers to oversee the world’s 30 systemically important banks. “We expect the same from those whose firms operate and take on large risks here,” he said.
Mr Hammond is often seen by Brexit supporters as an obstacle to a clean break with the EU, with the Treasury accused of doom-mongering over the likely economic impact.
But the chancellor said the department, on his watch, was not “the enemy of Brexit” but would rather be a “champion of prosperity for the British people outside the EU, but working and trading closely with it”.
Both he and Mr Carney underlined the City’s historic ability to weather periods of transformation in the economy, with the latter backing the chancellor’s strategy of securing new “global financial partnerships” with emerging economies after Britain leaves the EU.
Mr Carney asserted that in a “new world order”, emerging markets would account for a growing share of global financial assets: if the UK were able to maintain its current share of cross-border capital flows during this process, the balance sheet of its financial sector could plausibly increase from 10 to 15 times GDP by 2030.
Mr Carney painted a picture of a modernised financial services sector, underpinned by thriving fintech companies, particularly in the area of payments. He said £600m could be saved on cross-border payments through modernised payments technology.
Mr Carney also welcomed the Treasury’s announcement of a £1.2bn capital injection for the BoE and a new financial arrangement that will significantly increase the amount of liquidity the central bank can provide without needing to seek an indemnity from the government.
He said this would give the BoE “a balance sheet fit for purpose” and would strengthen its ability to fulfil its remit on monetary stability.
The Investment Association said it welcomed the chancellor’s remarks on equivalence not being fit for purpose. “Rather than focusing on semantics and labels we should centre the debate on how the new regime is determined, how it is continually assessed by both sides, and how the appeal mechanism will work,” said the body representing investment managers.
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